| All-units Discounts and Double Moral Hazard Contributor(s): Federal Trade Commission (Author) |
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ISBN: 1502490641 ISBN-13: 9781502490643 Publisher: Createspace Independent Publishing Platform OUR PRICE: $9.45 Product Type: Paperback Published: September 2014 |
| Additional Information |
| BISAC Categories: - Business & Economics |
| Physical Information: 0.08" H x 8.5" W x 11.02" (0.26 lbs) 40 pages |
| Descriptions, Reviews, Etc. |
| Publisher Description: An all-units discount is a price reduction applied to all units purchased if the customer's total purchases equal or exceed a given quantity threshold. Since the discount is paid on all units rather than marginal units, the tariff is discontinuous and exhibits a negative marginal price at the threshold that triggers the discount. Why would suppliers offer such tariffs? This paper shows that all-units discounts can arise in optimal contracts between upstream and downstream firms with market power who make non-contractible investments that enhance demand. I present conditions under which all-units discounts dominate two-part tariffs and other continuous tariffs. I also examine these tariffs when the upstream market faces a threat of entry. In the cases considered, continuous tariffs are a more profitable device for managing entry than all-units discounts. These findings begin filling the gap in economists' understanding of the equilibrium effects of all-units discounts in intermediate markets in which contract design affects incentives for pricing, investment, and competitive entry. |